Reducing South Africa's mining dependence

South African mining will not last forever. Besides being an energy-intensive industry, mining creates other problems – a rent seeking economy and resource curse problems. Over the next 20 years, South Africa’s challenge will be to transition away from mining and towards new capabilities. Renewable energy sources and associated services can play an important role in opening new economic sectors and helping solve the energy crisis. A broader, low-carbon economic transition will also be a better way to locate new ideas and approaches for a coherent national vision and strategy.

The South African mining sector contributes R263 billion to the GDP, amounting to 8.6% of the total and creating over 500,000 direct and 500,000 indirect jobs. It represents 50% of forex, 12% of investment, and 13.2% of corporate tax receipts. The national dependence on mineral exports is significant, and will not diminish anytime soon given where manufacturing capacity is going.

Although extraction costs are rising and the number of decades left before mineral resources are depleted dwindling, the country’s minerals and energy complex (MEC) will continue to play an important role in South Africa’s economy. The entire mining and energy cluster is under government policy, regulatory, and allocation control, a level of control that is a double-edged sword – both as a source of economic growth but also as windfall for rent-seekers.

How South Africans govern over the MEC will determine South Africa’s future and its ability to diversify its economy even further.

The MEC spend runs into the trillions if viewed as a cluster rather than just raw materials. One simply needs to look at the projected pipeline of mining and energy sector investment projects to see how vast the ambition is. Projects also include new areas of exploration such as oil and gas. Much of this investment potential is delayed by regulatory issues, and in the medium-term by the state’s ability to continue providing guarantees for new infrastructure projects given the cash-flow bleeding that is happening in Eskom, SAA, and other state enterprises. Their poor performance is leading the government to continuously bail them out, creating a vicious cycle of inertia and grid-lock.

As mining and minerals processing is an energy intensive industry, the country is facing the need to grow its levels of installed power capacity. Public electricity utility Eskom’s ability to finance is limited, and large plants have long lead times. In the interim, renewable energy sources are filling that gap. Talk of big gas and nuclear capability is also in the cards, but in the case of nuclear most observers believe it is both unnecessary and – given the level of capitalisation it requires, close to $100 billion – potentially riddled with conflicts of interest, backhand deals, and corruption. If it were to go ahead, it could easily place South Africa on a path towards a fiscal cliff, especially if it is not matched by a simultaneously growth in the economy. There is nothing worse than excess power coupled with lagging growth.

Nonetheless, the energy deficit is driving new investment in power plants and is also a source of new technology adoption, innovation, and entrepreneurship. Fixed capital formation over the last four years has largely been driven by the Renewables Independent Power Producers Programme (REIPPP.) Ironically, the crisis is creating impetus for more renewables, both on-grid and off-grid solutions and utility and non-utility scale options. This has been shown, for instance, in the largely private sector investment of R190 billion (roughly $19 billion) or so worth of sector capital injection for close to 5 gigawatts (GW).

There is still more to come as Independent Power Producers (IPPs) are being broadened to include more than the renewables industry. This expansion will also be seen in the distributed generation sector, since commerce, industry, and rich households may want to defect from the grid if they see it as providing better energy security and electricity price management. Private capital for self-generation is moving to new stand-by and complementary generation capacity, and we are already heading in the direction of hybrid systems – systems that are both centralised and decentralised. This will have consequences for the utility model and prospects for future affordable energy, but this is a topic for a separate discussion. Nevertheless, there is growing weariness that Eskom is not strong enough to drive the country’s power, and that betting on a single supplier for all the country’s needs is a high-risk proposition.

Competition in the renewables space has been fierce, with bidding prices showing high levels of price differentials between the first and fourth rounds of IPP bids. State procurement that is well-designed, corruption free, and tied to socio-economic development goals need not only meet price requirements but also support manufacturing and, with time, higher levels of industrialisation in the manufacturing of renewable sector components. The REIPPP procurement model – for all its flaws – is at least seeking to grapple with the balance between price and broader development goals. The REIPPP gives us all confidence that specialised procurement units can work when procurement processes elsewhere in the government system suffers from dysfunction, conflict of interest, and rent-seeking. This is the great success of the REIPPP.

Importantly, many of these renewables projects are taking place in economically depressed areas of the country. They are also geographically diverse because of the nature of the wind and solar resource bases. They not only diversify farmers’ or land-owners’ incomes, but provide an opportunity for economic uplift across many communities. However, like it is for mining social and labor plans, you need to work hard at turning community revenue streams from renewables projects into robust development outcomes – this will not happen by osmosis.

Strategically, South Africa can also play an important service and component export role for the rest of Africa, where there is a dearth of energy supply for a significant untapped energy demand of over 500 million or more southern African consumers. The once laughed-at sector now has significantly more potential that needs to be harnessed. Africa is ripe for more renewables penetration, despite large-scale bulk energy infrastructure being more capital intense and likely to be more expensive and take longer to accomplish. Fundamentally, the importance of the green sector in helping to diversify the manufacturing base in South Africa needs more coordination and policy focus.

South Africa’s export mix is not diverse enough and has remained unchanged since 2006. There is a need for South Africa to diversify its exports, and this will be possible only through more determined export-orientation of the economy.

Energy linkages can also usefully support regional integration because of the dependence on good relations and good politics it requires. This can provide a platform for the export of tradable services, with energy links serving as bridges for many other things – both from the government and private firms. South Africa’s inter-regional energy trade and services needs enlightened policy. Renewables can help build that bridge and lead the way.

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